Can You Live Off Your Home Equity?

Even with the current problems in the real estate market, there are still homeowners who have a decent amount of equity in their homes. These homeowners are likely to have been in their homes for a long while. As a result, there is significant equity to be tapped.

If you are in retirement, or if you are looking for strategies to shore you up for retirement, your home equity can be an asset in some cases (but not every case). For those who are a little older, here are some ways to tap the equity in your home:

Home Equity Loan, or Line of Credit

You can always borrow against your home’s equity. However, you do need to be careful. You will have to make payments on the loan regularly. The interest rate might be quite low, and tax deductible to boot. However, if you get to the point where you can’t make your payments, you might be in trouble — and you could lose your house.

If you decide to go the home equity loan/line of credit route, you’ll need to ensure that you can make the monthly payments. Without a job, though, you may have a hard time qualifying.

Reverse Mortgage

These financial products have exploded in recent years. If you meet certain age requirements, you can receive payment from your financial institution. The loan doesn’t have to be repaid until you move out of your home and sell it, or until you die and the estate sells your home to pay the debt.

Unfortunately, reverse mortgages are notoriously expensive. There are usually high fees and comparatively high interest rates. You shouldn’t complete a reverse mortgage if you want to leave your home to your heirs. Since a reverse mortgage is usually paid off through the sale of the home, it doesn’t make sense to get one if you expect your kids and grandkids to enjoy the home.

Another option is to put together an arrangement for a private reverse mortgage from your kids. You have to be careful about this, though, and make sure that you put together an actual loan agreement. One of your children can pay you each month, and charge you less in interest and fees than a bank would. You agree to repay the loan. This usually means, though, that the private reverse mortgage would still have to be repaid with the proceeds from the sale of the home. But doing it privately is one way to ensure that more of your money stays with you.

Downsize

Another option for getting the equity out of your home is to downsize. You sell your home, and then use the capital you have now to buy a new, smaller house. The difference between your old home and your new home could be used for whatever you want — including investment. You could even find a smaller apartment, condo, or home to rent. Invest your large chunk of capital, and then use the interest to help make your smaller monthly payments.

Downsizing can be beneficial, since it often means that you also have lower utility costs, and you can save on maintenance and repair costs. As long as you don’t mind getting rid of some of your stuff and moving into a smaller living area, downsizing can be an elegant solution, and one that doesn’t cut into your wealth through the fees and interest associated with loans based on your home equity.

Get Creative: Sale-Leaseback

Another option is to do what’s called a sale-leaseback. In order to complete this transaction, you need to make sure that you are at “arm’s length.” You can sell your home (at market value) to someone you trust. Then, you receive the lump sum. You then rent the home from the new owners. You can exclude some of your gains from the sale from taxes, and use the money to invest. You pay the rent, and the new owner is in charge of maintenance. Plus, the new owner can receive the rental income, and some tax advantages.

To do this, though, you need a proper contract and to adhere to market values. Otherwise, the IRS might decide you owe taxes after all. But, when properly executed, it can be a win-win for everyone involved.

Author

Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.

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I'm just an average mom, trying to live a frugal life and get out of debt. I write about things that have (and haven't) worked to improve my family's financial situation. What works for me may or may not work for you, and you should always consult a financial advisor before making important financial decisions.

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